Friday, July 21, 2006

Color on Microsoft (NASDAQ:MSFT)'s results

- JP Morgan notes MSFT saw two items favorably impact results in Q4, both driving Client to be $150M ahead of firm's target and the upside to their model. First, PC shipments, as reported by Gartner came in at +11% at the higher end of co. guidance and second, MSFT saw a resurgence in Com. and Retail licensing which grew 6% yoy, the first growth in years-- a positive in front of the Vista release in the Fall. Client also saw an $89M favorable impact from the shift to recognizing rev. on sell in vs. sell through.

MSFT also saw a significant uptick in unearned income, which grew to $10.9B ahead of target of $10.2B with the $1.9B seq. increase the largest the firm has seen in years.

Beyond the strong bookings, the key event on the release is the announcement of $40B to be returned to shareholders with $20B near term in a modified Dutch auction. Firm assumes it will get completed at or near $24.75 per share, slightly ahead of the 90 day avg. of $24.50, which will result in roughly an 8% decrease in shares outstanding. The $40B is above the $20-30B they estimated MSFT would announce in their "First Step in the Road to Recovery" piece earlier this month, and is the driver for the roughly $0.06 raise to FY07 EPS guidance.

Firm's new EPS for FY07 is $1.46 +15% yoy, while FY08 is $1.72 +18%. The stock will move towards the upper end of the tender range near term, and will likely settle in the $24 range by late August. With Q1 numbers that look conservative, and an accelerating EPS story in 2H-07 and into FY08, they'd expect the stock to outperform as we near the December quarter and get closer to the major Vista and Office releases.

- Friedman, Billings, Ramsey MSFT notes MSFT reported a solid quarter with revenue and EPS upside, strong guidance, and a significant tender offer. The company announced a $20 billion tender offer, coupled with a new $20 billion share repurchase program; this is a smart use of the company's excess cash, should buoy the stock, and sends a positive message to investors. Firm's thesis remains intact - they believe the company is embarking on a significant multi-year product cycle which should drive accelerating revenues (11% in FY06 to 13% in FY07). Maintains Outperform and $32 price target.

- UBS notes that given the negative sentiment heading into last night's call, the performance in the quarter in and of itself would have been enough to push the shares higher today. However, by management finally heeding investor's call to action to return even more cash to shareholders with its announced $20b tender offer, firm's see this gesture as potentially leading to a reversal in investor sentiment as far as Microsoft is concerned. Guidance for FY07 implies a top line growth rate of 13% at the mid point, which compares to 11% growth in FY06, with operating income growing faster than sales in the back half of the fiscal year. As well, while many are focused on the fact that Vista could be delayed again and as such be a negative catalyst, we note that based on management's commentary and our own analysis, even a 1 quarter delay in Vista (although still expected to launch for businesses in November and consumers in January), would only impact sales for the year by $200m-$400m. Sees next Thursday's analyst day as being another positive catalyst for the shares and would expect more granularity regarding what type of return the incremental investments being made in FY07 could potentially drive for the company over the next 2-3 years.

Maintains Buy and $31 tgt.

Notablecalls: Nice qtr. Nice gesture. Don't expect the stock to move much above the levels reached in after mkt trading. It will take some time to turn this tanker around.